Natural Gas: Follow the Signals For Alpha on the Short-Side in 2H

Takeaway:Natural gas broke through its key $4.58 @Hedgeye TREND Level of support of $4.58 and may see further downside.

On June 25th natural gas broke through its BULLISH TREND resistance level and confirmed a BEARISH TREND on June 30th.

TREND = duration of 3 months or more

TAIL = duration of 3 years or less

With inflation accelerating and growth slowing, the commodities complex faces upward pressure in 2H. Despite USD-devaluation induced inflationary pressures driving prices, natural gas may have more room to fall without an unpredictable geopolitical catalyst. Instead we'll stick to the multi-duration risk signals for confirmation. We highlighted the downside risk after breaking through its TREND level of support.

It has since sold-off nearly 9%...

The long-term TAIL support Line of $4.20 is under pressure this week, and further downside risk looms without confirmatory long-conviction at $4.20. Spot contracts are down -5.2% this week on NYMEX, so we're watching this level:

WTD: -5.2%

1-Week: -6.2%

3-Week: -9.7%

After breaking out in January, $4.20 has been tested twice. The supply disruption risk has certainly been priced out of markets for the back half of the year.

Barring a geopolitical catalyst, a break through the TAIL Line of resistance would signal further downside risk, making the likelihood of re-testing year-to-date highs more extreme.

Eustream AS penned an agreement with Ukraine on April 28 to supply about 10bcm/year through 2019 via the Vojany pipeline. The pipeline is on track to be fully functioning by September. Vojany, which has been closed for 15 years, would satisfy an estimated 20% of Ukraine’s annual demand. With the capacity of smaller pipelines from Hungary and Poland, Ukraine has the potential to satisfy about 2/3rds of its annual demand directly from countries outside of Russia.

Alternatives aside, the source of this flow is Russian-dependent, but it forces Moscow to involve other European countries without targeting Ukraine in isolation. Putin’s strategy throughout the conflict has been consistent in providing support for pro-Russian separatists while at the same time cooperating with the international community just enough to warrant plausible deniability.

We believe Moscow’s likely goal is likely to maintain and expand its influence in Ukraine's eastern provinces, keeping it weak and vulnerable with existing in the global spotlight. The EIA estimates that Oil and Gas make-up 70% of total annual exports ($515Bn). U.S. and EU-induced sanctions (which have just recently warned of financial and energy sector targeting) would provide further downside for the Russian economy.

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07/09/14 10:44 AM EDT

FLASHBACK | Selling: Russell Levels, Refreshed $RUT $IWM

Takeaway:As you think about how painful it might be to short the domestic growth style factor right here, it probably felt the same in March too.

Editor's note: The following note was written by Hedgeye CEO Keith McCullough on July 01, 2014 at 11:57 in Macro. The Russell 2000 is down approximately 3% since. If you're a professional looking for a research edge click here for more information on how you can subscribe.

POSITION: 7 LONGS, 8 SHORTS

I #timestamped my most recent cover signal on the Russell 2000 on June 12th, so there’s been a lot of waiting and watching going on for the better part of the last 3 weeks. While not perfect, over the years I have had to teach myself to act on my signals, not my emotions.

Being bearish on US consumption growth (and the highest multiple growth stocks within the Russell that are tied to US demand) doesn’t have to be accepted at every time and price. Hedge fund consensus dog piled the short side of the market in May. I think June’s meltup had a lot to do with that.

Which brings us to today – Happy Canada Day! And a fresh SELL signal at 1208.

There are a few things to note about the 1208 line. Most importantly, it’s where you could have sold the Russell before its 10% draw-down. And maybe as importantly, now it’s easier to see all the reasons why you’d have sold growth in March (and bought inflation and slow-growth #YieldChasing).

For now, across our core risk management durations, here are the lines that matter to me most:

Immediate-term TRADE overbought = 1208

Intermediate-term TREND support = 1169

In other words, my risk management model considers a -3% correction from this level more than improbable. And as you think about how painful it might be to short the domestic equity style factor of the market right here and now, it probably felt the same way in March too.

From a fundamental research perspective, we still think #Q3Slowing will be the story Consensus Macro will have to re-adjust for from now until September. We’ll host our Q3 Macro Themes call on why next Friday.

"Nike Inc.’s 13-year relationship with Manchester United will end next season because renewal terms sought by the record 20-time English champion were excessive…"

"The current contract, signed in 2002, is worth a minimum of 23.3 million pounds a year to United through the 2014-15 season. The team wanted to increase that to more than 60 million pounds, a person familiar with the discussions said yesterday."

“'Any partnership with a club or federation has to be mutually beneficial,' Beaverton, Oregon-based Nike said in an e-mailed statement. 'The terms that were on offer for a renewed contract did not represent good value for Nike’s shareholders.'”

Takeaway: After a black eye in Brazil yesterday and reports that the company is terminating its 13 year partnership with ManU, NKE could use a tire pump. This new football cleat (American football this time) release is textbook Nike. Take an existing piece of innovation, incorporate it across product categories (running, basketball, soccer, football), stager the release dates, issue a press release and voila. There's not another player in the game that can create the type of buzz around product launches like Nike.

"Sears and Kmart, two leading integrated retailers focused on making shopping easier for Shop Your Way members and customers, are introducing a unique online/in-store collaboration to allow pick up of sears.com or kmart.com orders at any of each other's stores – more than 2,000 locations nationwide – ready in five minutes or less."

Takeaway: Rarely does SHLD set the standard in this space, but this buy online/ pickup in store initiative across banners is impressive. TGT and KSS take note. Both are way behind Sears and Kmart, with TGT rolling out buy online/pickup in store nationwide in fall '13 and KSS set to begin the program in 3 markets during the 3rd quarter of this year. If more purchases are going to shift to the internet then at least give consumers a reason a convenient reason to visit your stores. They may even go inside.

"On Tuesday, the company revealed that Mark Brashear, who resigned last month as chairman and ceo of Hugo Boss Americas, has been brought on board as global men’s wear president for the rapidly growing Kors brand. Brashear will spearhead a major expansion of the company’s men’s business, which will include the rollout of freestanding men’s stores starting next year as well as the extension into new categories, as Kors surges toward its goal of building a $1 billion men’s brand."

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